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Summers Defends Stimulus Spending

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The Tampa Tribune

Published: March 14, 2009

WASHINGTON - Lawrence Summers, President Barack Obama's closest economic adviser, broke a long public silence Friday, asserting that today's economic problems stem from an unsustainable financial model and defending heavy deficit spending as a necessary evil to restore the economy.

Summers, a treasury secretary in the Clinton administration, now heads the policymaking National Economic Council inside the White House. He said the current recession was sparked not by the normal business cycle but by excesses such as inflated asset prices and insufficient regulation that had built up and finally collapsed.

Why is Obama moving on health care, energy, education and other areas? Shouldn't the focus be on the economy?

I can't imagine that it would be rational not to provide assistance to students, not to work on making higher education affordable, not to increase financial confidence in the country by doing the work of getting health care costs under control, not at a time when there are millions of people unemployed; to be thinking about a sector like energy and the environment, where new jobs can be created.

Why hasn't Treasury Secretary Timothy Geithner spelled out his plan to get so-called toxic assets off bank balance sheets so they can lend?

The easy thing to do would be ... to lay out a nine-point plan with illusion of specificity and the sense of certainty about what the future would bring. The approach that Secretary Geithner has taken is an approach that lays out a framework that - unlike so much of the commentary - recognizes the enormous complexities of the problem and the balances that need to be struck.

What kind of balances need to be struck?

The need to address on the one hand the capital markets and on the other hand the banks and not to do what so many do ... and fail to recognize the profound interlinkages. The whole question about the toxic assets in the banks has to do with the health of the capital markets and in what way those assets can be sold.
Chinese Prime Minister Wen Jiabao worried on Friday that America may not make good on the $1 trillion in debt it owes China. Does America's stimulus spending risk a debt default?

In the short run, the need is to get the economy going again and to get the private financial system working again and to reactivate those markets. And ... it's not something that will happen automatically simply through patience. You have to be prepared to prime the pump, and if you allow the process of decay, decline and deleveraging to continue, it's much more costly to do it later. The ultimate burdens are ... much greater and the loss of confidence and ability to attract foreign capital is that much more profound.

Still, our debt is exploding. Won't this have long-term consequences?

Look, I think we need to do what's necessary to get us out of the crisis that we inherited. My speech was intended to persuade you of one thing if you didn't agree with anything else - that this was not a set of automatic processes that will automatically fix themselves if you didn't act. If deflation sets in, if the gross domestic product collapses further, ... the magnitude of the federal borrowing, as large as it is today, will be dwarfed - will be far larger. So I believe the approach the president is taking is the ultimately fiscal responsible approach because of the risk it avoids and it contains.

McClatchy-Tribune

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